SWIB bonuses: David Villa

David Villa is chief investment officer for the State of Wisconsin Investment Board. His $441,926 bonus this year boosted his total package to $884,426, the highest in the state agency and slightly higher than his total last year of $874,914.

Another year, another round of massive bonuses for the financial gurus who make investments for the state’s pension fund.

Six-figure payouts on top of six-figure salaries that dwarf the pay of teachers, nurses, garbage collectors and, yes, newspaper columnists wouldn’t be so galling if there were more evidence that “beating the market” was mostly about skill, as opposed to luck.

Or, barring that, if the gurus had a bit of their own skin in the game. The Wisconsin Retirement System is one of the country’s best state pension funds. But that has more to do with factors not under the control of people working for the State of Wisconsin Investment Board, which manages its assets.

First, WRS is loaded. As of March 31, its two funds totaled $93.3 billion. Kudos to past and present state officials, employees and unions who made sure there was a nest egg to invest.

Second, markets, over time, go up. If you’ve got lots of money to invest and lots of time, you’ve got most of the investment game won. Put that money in mostly low-cost, “passively” managed funds that track the broader market, and you’re going to make a lot more money.

Finally, WRS Core Fund investment returns are “smoothed” over five years to protect retirees’ income from violent, but temporary, shifts in the market.

You still need managers to make sure WRS’ assets are well- (or at least not stupidly) allocated, and for good managers, there are probably opportunities for beating the “inefficient markets” — certain international or less-common investments whose prices don’t always correlate with their true value.

But when you’ve got the money, time and safeguards WRS does, it’s hard to argue a SWIB manager’s job is hard enough to be worth, say, the $884,426 chief investment officer David Villa will make this year.

That said, it seems only fair that if a SWIB manager adds more value to WRS than the rise in the value of her comparable, index-based “benchmark,” then she should get a cut of that value in the form of a bonus.

The manager who fails to meet or exceed a benchmark is effectively depriving WRS of value, and he deserves a temporary pay cut. Call it an “anti-bonus.”

That’s not part of SWIB’s compensation plan, though, even if managers could probably handle it: The lowest-paid SWIB investment analyst still makes a base salary of $77,680.

SWIB’s best explanation for why it needs to pay its managers so much is that if it doesn’t, they’ll decamp for the private sector, where they can make even more money.

That’s probably true. The financial services industry has spent a lot of money convincing policy makers and the public of the dubious notion that its money managers consistently generate higher returns than the market as a whole — and, as a result, are worth higher salaries than the workforce as a whole.

Indeed, SWIB spokeswoman Vicki Hearing told me that “without competent staff,” SWIB would need outside help to the tune of “an additional $63 million in fees to Wall Street.”

In other words, SWIB could be blowing even more money better spent elsewhere. Call it a silver lining if you like.

Capital W: Plug in to Wisconsin politics

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Contact Chris Rickert at 608-252-6198 or crickert@madison.com, as well as on Facebook and Twitter (@ChrisRickertWSJ).